The world is increasingly going digital. And whether that's something that makes you comfortable or not, it's a reality that's important to accept.
But as more companies and workspaces move from physical to virtual, the need to store and protect data is only going to increase. That's where data centers come in.
Though data centers have been around for a long time, in recent years, the demand for them has increased. And we're likely to see that trend continue in 2022.
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A potentially strong year for data centers
There are several factors that are setting the stage for a huge uptick in near-term data center growth. First, there's the fact that more and more businesses are moving online, whether by building out e-commerce websites or designing their own apps. All of this only fuels the need for digital storage.
Furthermore, in the course of the past two years, consumers have increasingly shifted to digital sales due to COVID-related concerns. And an increase in e-commerce should continue to drive the need for data centers.
The same holds true for remote work. At this point, many companies have kept their staff remote for roughly two years. And while some may be planning to eventually return workers to office buildings once it's safe to do so, it's fair to say that many companies will be maintaining some degree of remote work for the foreseeable future.
In fact, a lot of companies have already introduced plans for hybrid work models, where employees report to an office for part of the week and work from home or another remote location for the remainder. For these setups to work, a lot has to happen digitally. Workers will need the option to access proprietary programs and data even while outside of their companies' networks. And that alone makes a strong case for data center expansion this year.
How to invest in data centers
Most investors can't just go out and buy a data center. Instead, a good way to break into this space is to put money into data center REITs (real estate investment trusts).
Though any investment carries risk, data centers are a pretty solid bet right now for a few reasons. First, they're a necessity in today's digital world. They're also not an expense businesses can simply seek to cut back on. And so like healthcare, data is a pretty recession-proof industry, and that alone makes data center REITs them less risky.
That said, there are risks associated with data centers. For one thing, the cost of constructing data centers can be high. That's because a lot goes into these facilities. Not only do they need to be climate-controlled, but they need to be physically secured. Many data centers house sensitive information, and they can't afford any sort of breach. As such, they require a hefty investment from the start, which could eat into revenue.
Furthermore, any time we talk about REITs, we have to think about supply -- or, more accurately, oversupply. If data centers start rapidly popping up in 2022, it could oversaturate the market.
But while that's something to acknowledge as an underlying concern, it's doubtful that we'll actually reach that point this year. Right now, there's a huge need for digital storage, and so data centers are designed to serve a need that's not only immediate but one that's likely to increase in time.
One pick worth looking at
While there are a number of data center REITs you might choose to add to your portfolio, a good starting point is Digital Realty Trust (DLR +0.06%), one of the largest data center REITs in the world. Over the past five years, its share price has risen roughly 47%. And while it certainly wouldn't be accurate to call Digital Realty Trust a bargain REIT, it is fair to say that the data center giant could see a lot of near-term and long-term growth in its future. And so if you're looking to start investing in data centers, it's one company to consider putting on your list.
All told, there's reason to believe 2022 will be a big year for data centers. It could pay to invest sooner rather than later -- before data center REITs cross into the realm of unaffordable.
